Home financing regulations have become a little more clear. New federal rules—which are intended to prevent the risky loans that sank the housing market—went into effect Jan. 10, and consumers may need to do a bit more work to get a mortgage.
The QM rule is designed to ensure that lenders only make loans to borrowers who can repay them, meaning you may have to do more to prove that you really can afford that home loan.
Here is what you need to know about the new rules:
You may have trouble finding “riskier” loans. The QM rules make it more difficult and more expensive for borrowers looking for alternative financing (such as the risky loans available during the housing boom).
That’s because under the new rules, if a lender makes risky loans—those that require borrowers to spend 43 percent or more of their household income to make mortgage payments—that lender would need to accept a portion of the risk on the loan.
In many cases, lenders may be more hesitant to make riskier loans knowing they could be responsible if a borrower defaults.
Additionally, total points and fees cannot exceed 3 percent of the total loan amount, and loans cannot have any negative amortization or balloon features that make it difficult for borrowers to meet payments.
You must be able to repay your loan. Under the new rules, a borrower’s debt-to-income ratio—how much is owed compared to how much the borrower makes—cannot exceed 43 percent when the mortgage is included.
You may still be able to get a loan if you’re above that debt-to-income level, but you may face more challenges, mostly in terms of documentation.
Under the QM terms, lenders must verify borrowers’ income and assets. This can lead to a lengthier approval process, and may pose certain challenges for self-employed buyers.
Down payment requirements will remain strict. The QM rule doesn’t set any down-payment requirements, but buyers may still find they need to put down a substantial sum of money to stay within the 43 percent debt-to-income ratio.
Buyers who can’t afford a higher down payment can consider FHA loans, but these can be problematic in higher cost markets. Recently, FHA announced it would reduce loan limits in the highest cost markets to $625,500, down from $729,750. If a homeowner needs a loan above $625,000, they may have to get a jumbo loan, which in general requires a 20 percent down payment.
Steve Cook is editor of Real Estate Economy Watch, and is a member of the National Press Club, the Public Relations Society of America, and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate companies, financial services companies, and trade associations, including some of the leading companies in online residential real estate.